Cost pressures

23 Aug 2022

Sector: Materials

Investment implications

1H22 Results: Earnings and dividends missed market expectations on higher costs. Wet weather was a factor. An increase in working capital lifts the balance sheet leverage to 2.0x (net-debt to EBITDA) and gearing to 43%. We expect the market to make significant cuts to 2H22 earnings estimates. Result quality was poor.

Result Details: NPAT $54m vs $65m market, EBIT $80m, vs $95m market, ex-property sales EBIT $68m, down 30% on pcp. DPS 5cps vs 6.5cps market.

Earnings benefited from a lower tax rate of 22% vs 28%. Operating cash flow fell 34% vs pcp.

Outlook: No formal guidance. Demand is expected to remain strong. Growth in underlying earnings is expected for 2H22, but “subject to weather, inflationary headwinds, and traction with out-of-cycle pricing”. Going into the Result, the market was looking for $74m NPAT in 2H vs the $54m delivered in the 1H.

The reliance on growth being subject to out-of-cycle price increases is significant and tough to rely on given the recent performance of the company to push through price increases.

Result overall: ABC is operating in a tough environment for earnings. Demand remains strong, but the inability to push through price rises in a timely manner leaves earnings well below expectations.

Whilst some of the weakness in today’s result can be explained by wet weather-related costs along the east coast, there is no escaping the fact earnings estimates for 2H22 will face mid-teens downgrades.

Whilst the PER multiple has fallen from 17x to 12x this year, we don’t yet see value in the ABC share price given continued expectations of earnings headwinds.

Figure 1: ABC 1H Earnings $68m vs $95m expected

This commentary reflects our initial view. For detailed reports for companies under Sandstone Insights coverage, see our latest research notes for our investment view and specific risks associated with investing in these companies.

Stock overview

Share Price

Company overview

Adbri Limited is an Australia-based construction materials and industrial mineral manufacturing company.

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